PM Monthly Commentary - January 2019

davefairtex
By davefairtex on Sun, Feb 3, 2019 - 7:56am

On Friday, gold fell -3.58 [-0.27%] to 1322.35 on moderate volume, while silver plunged -0.16 [-0.96%] to 15.91 on very heavy volume. Crude climbed +2.56%, while bonds declined [TLT:-0.83%]. The rest of the market was fairly quiet.

The January metals sector map is bullish once again: junior miners are leading seniors, miners are leading metal, and silver is leading gold. This is a classic metals bull market configuration. Gold has issued a “golden cross” (50 crossing 200), as has gold/Euros. Most everything is above all 3 moving averages. It is a pretty happy picture for the metals space.

Name Chart Chg (M) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Palladium $PALL 9.16% 27.25% falling rising rising rising ema9 on 2019-01-31 2019-01-31
Junior Miners GDXJ 9.07% -2.14% rising rising falling rising ema9 on 2019-01-25 2019-01-31
Silver Miners SIL 8.47% -16.00% rising rising falling rising ma200 on 2019-01-30 2019-01-31
Senior Miners GDX 7.59% -4.46% rising rising falling rising ema9 on 2019-01-25 2019-01-31
Copper $COPPER 5.79% -13.00% rising falling falling rising ma50 on 2019-01-29 2019-01-31
Silver $SILVER 3.25% -7.22% rising rising falling rising ema9 on 2019-01-25 2019-01-31
Gold $GOLD 2.93% -1.68% rising rising falling rising ema9 on 2019-01-25 2019-01-31
Platinum $PLAT 2.86% -18.06% rising falling falling rising ma50 on 2019-01-25 2019-01-31
Gold/Euro $GOLD:$XEU 2.59% 6.61% rising rising rising rising ema9 on 2019-01-22 2019-01-31

Gold rose +37.78 [+2.93%] this month. The long white candle was a bullish continuation, forecaster moved higher into uptrend. This was another good month for gold. Except. On Friday, gold printed a swing high on the daily chart (43% reversal), and that is a hint that we might be seeing a short-term correction in gold. On the chart, we can see that gold is approaching its previous high at 1370. A break above 1370 would be a strong bullish sign. Gold remains in an uptrend in all 3 timeframes.

The Fed decided not to raise rates at the January 2019 meeting, but they did indicate that the rate increase program was going to be on hold for a time (“patient”) because of signals from the rest of the world that it was possibly entering a recession (“cross-currents”). As of now, the chances for a March rate increase were only 1%, while the December rate picture shows an 11% chance of a cut, and just a 3% chance of an increase. Likewise, just how much more balance sheet roll-off will occur is due to be decided in the near future, and I'm just guessing that the answer is “it will end pretty soon.”

COMEX GC open interest rose +22k contracts this month.

COT report is delayed because of the government shutdown.

Silver rallied +0.51 [+3.25%] this month, following through on last month's reversal. The long white candle was a bullish continuation, and forecaster moved lower but remains in a strong uptrend. Longer term, silver appears to be forming a rough double bottom pattern – it needs a close above 21 to confirm this. After rallying for a second month in a row, silver appears as though it might be executing a replay of 2016. Silver needs a close above 21 to confirm that pattern, however, which is a long way away. Shorter term, silver printed a (daily) swing high (48% reversal) on Friday, but remains in an uptrend in all 3 timeframes.

The gold/silver ratio plunged -0.48 to 82.20. Thats mildly bullish.

COMEX SI open interest rose +25k contracts.

No COT report this month.

Miners climbed +7.98%, outperforming both gold and silver just as they did last month. Most of the gains came after the Fed hinted it might be rethinking its balance sheet roll-off. The closing white marubozu was a bulish continuation, and forecaster moved down a bit but remains in an uptrend. Unlike gold and silver, XAU did not print a swing high candle print on Friday. If we are seeing a replay of 2016, the miners have yet to strongly take off, although the 6.7% move over the last week is suggesting that possibility isn't out of the question.

The GDX:$GOLD ratio rose +4.53% while the GDXJ:GDX ratio climbed +1.38%. That's bullish, for the second month in a row. Miners have a lot of catching up to do with gold, however; gold is relatively near a breakout, while the miners are a long way from their 2016 highs. To me, this suggests the potential for a large, rapid move, if and when it starts to happen.

USD

The buck fell -0.61 [-0.64%] on the month. Candle print was a swing high (77% reversal) and forecaster moved more strongly into a downtrend. DX is in a downtrend in all 3 timeframes, although the monthly looks the strongest. So far, that monthly has proven to be a good guide to where things go next.

The big movers vs the buck were: GBP [+2.83%], CAD [+3.67%], AUD [+3.2%], and CHF [+1.08%]. A combination of May's Unconditional Surrender (GBP), a huge move in oil, and a renewal of risk on drove these currency moves this month. EUR [-0.08%] was virtually unchanged.

US Equities/SPX

SPX rallied +197.25 [+7.87%] to 2704.10, recovering most of last month's plunge. The closing white marubozu was unrated, while forecaster shot higher, but did not quite move enough to trigger a buy signal on the monthly timeframe. Still, SPX is in an uptrend in both the daily and weekly timeframes, and it would not take much to see a buy for the monthly if this rally continues.

The sector map saw homebuilders in the lead along with defense, while sickcare and utilities did worst. Homebuilders are now back to levels last seen in October 2018;

Name Chart Chg (M) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Homebuilders XHB 12.79% -18.03% rising rising falling rising ema9 on 2019-01-24 2019-01-31
Defense ITA 12.52% -4.31% rising falling falling rising ma50 on 2019-01-23 2019-01-31
Industrials XLI 11.43% -9.98% rising falling falling rising ma50 on 2019-01-17 2019-01-31
REIT RWR 11.41% 6.63% rising rising rising rising ma200 on 2019-01-25 2019-01-31
Energy XLE 11.21% -14.79% rising falling falling falling ema9 on 2019-01-30 2019-01-31
Cons Discretionary XLY 9.87% 0.90% rising rising rising rising ma200 on 2019-01-31 2019-01-31
Telecom XTL 9.05% -2.37% rising falling falling falling ema9 on 2019-01-31 2019-01-31
Financials XLF 8.90% -12.78% rising falling falling falling ma50 on 2019-01-16 2019-01-31
Gold Miners GDX 7.59% -4.46% rising rising falling rising ema9 on 2019-01-25 2019-01-31
Technology XLK 6.94% -3.17% rising falling falling falling ema9 on 2019-01-30 2019-01-31
Materials XLB 5.60% -15.25% rising falling falling rising ema9 on 2019-01-25 2019-01-31
Cons Staples XLP 5.14% -7.66% rising falling rising falling ma50 on 2019-01-31 2019-01-31
Healthcare XLV 4.81% 2.92% rising falling rising falling ema9 on 2019-01-30 2019-01-31
Utilities XLU 3.48% 7.29% rising rising rising falling ma50 on 2019-01-31 2019-01-31

Internationally, the US was the second-best performing region, with Latin America first, and Europe last.

Name Chart Chg (M) 52w ch MA9 MA50 MA200 50/200 Last Crossing last
Latin America ILF 14.86% -9.02% rising rising falling rising ema9 on 2019-01-30 2019-01-31
United States VTI 8.54% -4.09% rising falling rising falling ma50 on 2019-01-17 2019-01-31
Emerging Asia GMF 7.94% -16.51% rising rising falling rising ema9 on 2019-01-30 2019-01-31
Developed Asia VPL 7.37% -14.75% rising rising falling rising ema9 on 2019-01-24 2019-01-31
Eurozone EZU 6.53% -19.54% rising falling falling rising ema9 on 2019-01-23 2019-01-31
Europe IEV 6.39% -16.53% rising falling falling rising ma50 on 2019-01-17 2019-01-31

VIX ended the month at 16.14.

Rates & Commodities

Bonds moved slightly higher, up +0.38%. The doji star candle pattern was bearish (43% reversal). That's actually not too bad given the strong rally in equities. TY moved up +0.58%, printing a long white candle that was a bullish continuation. Monthly forecaster remains in a very strong uptrend. However Friday looked a bit unpleasant: the daily candle print was a swing high (48% reversal), and the weekly entered a downtrend several weeks ago. Its a bit of a confused picture near term, but I'm going with the monthly for directionality – and that's up. That matches fairly well with two things: the Fed stopping the balance sheet roll-off in the relatively near term, as well as Powell's “cross-currents” washing ashore on the shores of North America in the not-too-distant future.

The 2-10 spread narrowed 3 bp this month, from 21 to 18.

JNK shot up +5.24%, wiping out the last two months of decline and then some. JNK's bullish engulfing/swing low/bullish strong line was in fact very bullish (86% reversal), but since I don't have a monthly forecaster for JNK I can't tell you what the trend is. But I can provide some clues: JNK's cousin HYB is in a daily and weekly uptrend – that's a positive sign. In addition, the BAA rate trend is pointing strongly lower; that's also a positive sign. All of this points to risk on, and line up fairly well with the rally in SPX in January.

Crude shot up +8.11 [+17.57%] to 54.27, a very large move in the master resource. The bullish engulfing candle was very bullish (a 79% reversal), and forecaster issued a strong buy signal for crude. Crude remains tied with equities and probably junky debt as well; the strong recovery in crude makes traders feel better about economic prospects, and energy equities are a decent-sized chunk of the equity market, and of course there's all that crappy shale driller debt that will default if oil stays down at 42 for too much longer. Rising oil prices (at least, to a point anyway) makes traders feel more comfortable. I suspect that's why Trump isn't tweeting any more about low oil prices; someone pointed out to him the linkage between cratering oil and cratering equities, and so he backed off.

Physical Supply Indicators

* The GLD ETF tonnage on hand rose +36.20 tons, with 824 tons in inventory.

* ETF Discount to NAV:

 PHYS 10.63 -0.99% to NAV
 PSLV 5.97 -3.51% to NAV
 CEF 12.90 -3.70% to NAV

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) shows no premium for gold, and a 1c premium for silver.

* Big bars premiums were: gold [1kg] 1.34%, and silver [COMEX 1000 oz] 3.69%.

Grey Swans & Geopolitics

  • Ebola: While Ebola seems under control in the previous outbreak area of Beni (6 new cases), in the new outbreak area of Katwa things seem more challenging (81 new cases). The vast majority of new cases in Katwa (86%) had either visited, or worked in, a health care facility before or after illness onset. Note to self: hospitals are dangerous places during Ebola outbreaks for both the staff, and any uninfected patients. Case load is more or less tracking sideways.  http://https://www.who.int/csr/don/31-january-2019-ebola-drc/en/

  • Turkey: the 10-year yield dropped to 13.97. All is well in Turkey. I'm guessing the junky debt rally is helping there too. I also get the sense that when Erdogan started making nice with the US again, that sure helped a lot with the bond prices. I wonder just how much “help” was provided behind the scenes.

  • Migration: Frontex tells us that migration to Europe was down in 2018 vs 2017. There were 80% fewer migrants into Italy (115k down to 23k), but the number of migrants into Spain have doubled (from 28k to 57k). There were 115k total illegal crossings registered by Frontex, the lowest amount since 2013. For the lower-wage working Italian citizen, this is a win. The Spanish lower-wage worker? Not so much. Political correctness at work. https://www.bbc.com/news/world-europe-46764500

  • EU Elections: The theory goes, “populist forces” are plotting to destroy the EU in the upcoming election. Or are they? Elections are scheduled for the end of May. https://www.politico.eu/article/populist-attitude-to-eu-matteo-salvini-far-right/

  • China – Tariffs: 27 days remain before the imposition of 25% tariffs on a wide array of Chinese products. China is suggesting it had made “important progress”, and after meeting with Vie Premier Liu He this past week in Washington, Trump agreed with that assessment, and said he hoped to meet Xi Jinping in person to sort out the remaining issues before the March 1 deadline. Copper prices support the positive sentiment; copper rallied +5.79% this month.

  • Yield Curve Inversion: the 2-10 spread fell by -4 bp, but remains in positive territory. So far, no inversion. The bid under treasury bonds is (probably) all about the Fed hinting it will stop rolling off its balance sheet, which means a big chunk of new supply will be removed from the market. I suspect these hints, rather than fears of recession, are keeping the 2-10 spread narrow.

  • North Korea: Trump and KJU will meet in the near future, with the date and location to be announced next week.

  • Mueller Investigation: Mueller's team charged Roger Stone with the by-now standard set of process crimes that arose from the investigation itself. Still no collusion with Russia. Acting AG Whitaker says that Mueller's investigation is close to being completed. What will the media do without the constant stream of “bombshells” provided by “sources with knowledge?” Perhaps the Democrats in the House can help with that.

Summary

Last month's risk off is now this month's risk on. Pretty much everything “risk” moved higher – but even treasury bonds didn't do all that poorly, and gold did reasonably well also. There was something for everyone in the Fed's latest move. The worriers heard about cross-currents, and the gamblers got to hear that the Fed was going to (probably) stop QT, and definitely stop rate increases – since everyone knows that rate increases slow the economy, that's good for stocks.

Will the cross-currents end up hurting more than the Fed moves help? My guess is, yes. Fed policy acts with a 9-month lag, supposedly, while those cross currents will be affecting the US economy tomorrow. What the Fed does now won't be felt until September. We still have the China trade negotiations ongoing, and it will provide a boost to risk assets once an agreement is reached, so I'd expect another move higher in anticipation of that denoument.

But once that is behind us, then we're back to economic news, and the news really isn't all that great from the rest of the world. Me – I'm waiting to sell the China trade settlement news. I think that will be the top – or at least, a top. That might also provide a reasonably good entry point for PM, which given how it has behaved recently, will do very well once the Fed starts to get gloomier on the economic situation, but might dip a bit in the meantime.

While there is no shortage of physical gold, silver premiums are starting to rise, at least in the bigger COMEX bars at the dealer I watch.

To provide the long term perspective, I leave you with a (roughly) 10 year gold & silver chats.

First. gold: You can see that a close above 1400 would break above the highs in place since 2014.  Gold looks as though it may be setting up to do this that.  Of course, it has tried to do so in the past 5 years and failed, but today gold is an out-of-favor asset class in a world where everything else is relatively near its all time highs.  Technically, we've had 2 shots at a breakout - the more shots the market takes, the more likely it is to actually break out the next time around.  The succession of higher-lows pattern also looks bullish.  And we've seen how gold does well when bad news hits, and equities sell off.  These are all positive for gold.

Now silver: Even though silver has done fairly well in recent weeks, on the long term chart, it is barely off its lows.  Right now it appears to be in a very tentative uptrend, but compared with gold (which is relatively close to a breakout), silver looks much weaker.  Another view of this is the gold/silver ratio, which is just off its high, hovering right around 82. During a real PM bull move, that ratio could well drop to where it was in 2011 (around 35), or even back to the 1980 low of 18.  This suggests that if gold takes off, silver's snap back off the lows could be very dramatic.

Miners are starting to move as well.  They too are at some decade lows, especially in the gold/XAU ratio.  Once traders figure out that gold is going up, the tiny gold mining equity sector will be the place to be.  We've heard this story forever, but based on the market moves I'm seeing, and what I perceive the future has in store (i.e. a recession), I suspect the out-of-favor gold, silver, and miners could do really well.

In 2008, gold had risen for 8 years, and it was at a peak, lots of hype, and so when everything sold off, gold was dragged down too.  Now, nobody has cared about gold for 5 years, while equities were the favorite son.  This is why - I think - we'll see something different in 2019/2020 than we did in 2008.

As a result of all of this watching-and-thinking, I'm pretty sure we are seeing a pre-breakout state for PM.  My only question is, will silver do its usual thing and outshine gold during the upcoming PM rally?  Or will it remain the poor stepchild in a safe haven move?  That one - I don't have an answer for.

And, of course, we could easily see a correction between now and the breakout that (I believe) is a few months in the future.  The China trade settlement could well cause it.

But that's what I'm seeing and thinking about now.

Current Trends – Monthly:

Uptrend: 10-year treasury, gold, gold/Euros, silver, crude, utilities, palladium, miners, platinum, DJIA.

Downtrend: USD, SPX.

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